Clinton Vetoes Bill Restricting Securities Suits

By NEIL A. LEWIS

Published: December 20, 1995

WASHINGTON, Dec. 19—
Ending weeks of suspense for several of the nation's powerful interest groups, President Clinton vetoed a bill late today that would have made it more difficult for shareholders to bring fraud suits against underwriters, corporate officers and accountants.

The legislation would have fundamentally altered the system, in place since 1933, that was designed to discourage fraud in the securities market by relying on a blend of private and government sanctions. While the measure preserved all the authority of the Securities and Exchange Commission to pursue fraud claims, it would have placed formidable obstacles before individual investors seeking to have their claims heard in court.

Both chambers of Congress had approved a compromise measure early this month. The President's prolonged and very public indecision about whether he would sign the measure produced a flurry of lobbying at the White House from groups lined up on either side of the issue.

Congress is expected to attempt to override the President's veto. Because the House has shown greater enthusiasm for the measure, it is likely a vote would succeed there. A vote to override would be a much closer contest in the Senate.

Mr. Clinton's veto also leaves him in the awkward position of asking some Democratic Senators to publicly reverse their positions. Some had voted in favor of the measure earlier this month in part because Mr. Clinton gave no sign that he disapproved of it.

The legislation was fraught with conflicting political elements for the President, and his closest aides had been engaged in an intense debate about what position Mr. Clinton should take. Mr. Clinton's senior economic advisers -- including Laura D'Andrea Tyson, who heads the National Economic Council, and Treasury Secretary Robert E. Rubin -- had argued that the legislation was a measured and appropriate response to complaints about frivolous lawsuits brought against corporate officers and others when a company's stock price dropped suddenly.

The push for the change was initiated by the nation's major accounting firms and by stockbrokers who act as underwriters and could be liable when a company does not perform as well as expected. But that coalition had been greatly strengthened by the support of high-technology companies that say they are especially vulnerable to such costly lawsuits because their stocks are inherently volatile.

But the technology industry, particularly in California, has been an especially vigorous financial supporter of the President and the Democratic Party. Senator Christopher J. Dodd, a Connecticut Democrat who was a principal sponsor of the bill and is also the chairman of the Democratic National Committee, pressed his arguments in favor of the legislation on the President in a meeting on Monday night.

On the other side, Mr. Clinton was warned by aides to be wary of an anticonsumer message in the bill. "He's unwilling to sign legislation that would have the effect of closing the courthouse door on investors who have legitimate claims," a White House statement said.

Consumer groups, as well as many securities regulators in state governments, warned that the legislation would hurt small investors who had been defrauded.

A major focus of the legislative compromise had been an effort to allow companies to make predictions about their performance without fear that such statements might be used against them.

Because shareholders now may sue by arguing that they were misled by glowing company predictions, corporate officials complain that they are counseled not to offer any meaningful information about future performance. The bill included a provision for a so-called safe harbor that protected a company from liability for forward-looking statements. Under the bill, those statements could not be used in litigation if they included cautionary language identifying all important factors that could change the outcome. In addition, a plaintiff would have to show that someone knowingly made a false statement.

Under the bill, a judge would have been obliged to determine whether a lawsuit was brought frivolously and then fine the plaintiff.

Senator Arlen Specter, a Pennsylvania Republican who opposed the bill, had asked Mr. Clinton to veto it on the grounds that it would "choke off many important suits to protect innocent investors."